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What is a cash cushion?

When I was a teenager I shared a bedroom with my brother. One evening he was stuck on chemistry homework and asked me a quick question. I had a pile of my own, so I told him to go downstairs and ask Dad. He did not want to go. Our dad had a PhD in chemistry and loved being asked, but he loved starting at the beginning: let's read the chapter, let's understand why they asked you this. My brother just wanted the answer.

I have turned into my dad. Founders come to me with cash getting tight, wanting a quick answer to what they think is a quick question. Am I in trouble? And I cannot answer it honestly until somebody actually looks. So I go fishing. Have you a P&L, a cash flow, a balance sheet, anything you can show me right now, or is it buried in a system on somebody else's PC?

Here is the thing. The numbers already exist. Someone just has to look at them. The cash cushion is the shortest look I know.

What is a cash cushion?

A cash cushion is the time your business would have if income stopped tomorrow and the bills kept arriving. Not a pot of money you set aside, not a savings account, not a rainy-day fund. A measurement. It answers the only question that matters when cash gets tight: how long have I got?

When a founder in a squeeze calls me, I strip it to four questions, in this order:

• What is your cash position today? What is in the bank, right now.
• After everyone is settled up, what is your net cash? Add what customers and anyone else owe you. Then take off what you owe: the VAT collected but not handed over, the PAYE, the suppliers, any loans. What is left is actually yours.
• What is your cost base? If you employ people and carry fixed monthly recurring costs, this one matters enormously.
• So what is your cushion, and what is the risk?

That last one is the cushion, and it is just the third number divided into the second: net cash divided by monthly cost base, in months. There is plenty else I would love to know about a business, and on a good day I get to ask. But those four get me to a risk rating, and a risk rating is something an owner can act on this week.

Pounds tell you what you have. Months tell you how long you have. That is the whole reason the cushion is worth calculating.

Cash cushion vs runway: same idea, different yardsticks

People ask me which one they should track, as though they were different disciplines. They are the same idea in different clothes. Both convert cash into time. Both come out in months.

In Own Your Numbers they are literally the same number: net cash over monthly cost base. One sum. Two names. Out in the wild, though, the words carry different assumptions. Runway is the startup word, usually measured against burn: how fast you are losing money each month while you grow into a market, with a funding round somewhere in the plan. Cushion is the word I use with owner-directors, measured against the full monthly cost base, assuming income stops. It is the harsher framing, on purpose. A big customer can go quiet with very little warning.

I will be straight with you: different people will hand you different formulas for both terms, which is why I put the working on the page rather than ask you to trust a label. If an investor wants runway and means cash over net burn, give them that. Keep the cushion for yourself. It is the one that tells you whether you can sleep.

Why your bank balance is not your cushion

My favourite Dublin story is Roddy Doyle waiting outside Tara Street station, when a lad walked up to his face and asked, are you Roddy Doyle? He said, I am, yeah. And the lad said, so what, turned round and went back to his mates. Andrea Piccini, a presentation coach I work with, later gave me a lovely reframe of that phrase: so what is an invitation to add the value you left out.

So: there is £10,000 in your business bank account. So what? If your cost base is a thousand pounds a month, that sounds like plenty of cushion and you can breathe. If your cost base is a hundred thousand pounds a month, I am instantly worried, and things are about to get stressful, or already are. Same balance. Opposite businesses.

And that is before we take off what you owe. A bank balance flatters you twice: it counts money belonging to HMRC and to your suppliers, and it says nothing about the rate you spend. Net cash over cost base shows you both. Until you do it, you do not know which of those two businesses you are running.

How much of a cushion is enough?

Short answer: enough months of cost base that a normal shock does not force an expensive decision. A VAT quarter, a slow-paying month, a customer wobble. Those are not disasters, they are Tuesdays. Your cushion decides whether you ride them out or start timing payments and ringing the bank.

Under one month is the danger zone. On our risk rating, with the cushion rounded to one decimal place and net cash above zero, 1.0 to 1.9 months is high risk, 2.0 to 2.9 is medium, and 3.0 or more is low. Beyond that I will not give you a single number, because there isn't one that fits every business, and anyone who hands you one without asking about your costs is guessing. Seasonality moves it. Lumpy tax bills move it.

The fuller treatment lives on the formula page, including five years of a real client's chart and what those same five years would have looked like with £50k and then £200k less in the bank. Read that next if you want the working. If you would rather see the whole ladder from cliff edge to resilient builder, the five cash positions lays it out.

How to see your cash cushion from Xero

All of the above is arithmetic. You can do it in a spreadsheet, and if you will honestly keep that spreadsheet current, do. If keeping it current is the part that slips, that is not a character flaw, it is an afternoon that never arrives.

What Own Your Numbers does is the keeping-current. It connects to your Xero read-only, works out your cash, net cash, cost base and cushion, and sends the answer every Monday with a risk rating and the few things to do about it. That is the Weekly Cash Score. Your first briefing in minutes, about a minute a week to read after that, and it cannot change a single thing inside your Xero.

Then you stop guessing and start owning. That is the whole point of the exercise.